It’s not panic time

Good morning everyone!

Most likely you have seen that the stock markets have been down and sharply over the last few sessions, yes? So is it panic time? I believe not.

Many investors, myself included, looked at the massive run up in share prices over the prior many weeks as Herculean. It was the second best performance of the stock market for a period of that length in history! One model of the stock market holds that investors are evaluating the future prospects of businesses and buying accordingly. This theory holds that people evaluate, analyze and buy/sell rationally. In general, I think this model holds true for only a small minority of investors. However, these investors are most likely to buy when the markets have tanked. Why? Because they can check their fear and evaluate the facts of a situation and make an assessment of the future and thus, unknown prospects of a business. In other words, they can see the disconnect between stock performance and business and economic performance. If there are any perceived disparities they will act. Likewise, these folks are also the most likely to sell when they believe that the stock markets have gone up too far and disconnecting themselves from the underlying reality of the economy and of business performance. Which brings me to my point.

I was up almost 80% in some of the stocks that I have been buying this year. My overall performance was an increase of almost 40%. I had been buying because I felt that the drama that was priced into the stock market (i.e. the low-level of the stock market) was unwarranted. However, I also felt that returns of 40% typically take 4-6 years to earn and was considering selling to lock in my profits. And I was not the only one apparently. Now throw into the mix a couple of iffy economic reports and you have big selloffs. But the fact is that the reports were really not that bad in the grand scheme of things. As I have stated on the blog recently we are at the bottoming phase of the recession. The recession has been deep and warranted – it has been a reckoning of our debt-based culture that has shaken many industries and households to the core. It has forced decisions on people that they have been putting off for over a decade. Now people are saving again. Now banks are making rational, money-making, long-term decisions. But we are still just now at the bottoming part of the recession. It will likely be mid to late-summer until things start ticking upwards again. This is all evidenced by the mixed nature of the economic data that is coming out – some good, some bad; and in roughly equal parts.

So should we panic? No way. Many predictions by economists have been expressing the opinion that the recovery will be slower out of this recession than other recessions. Good. This recovery will be based on solid economic reasoning, not debt-induced spending. So consumers and businesses are behaving sensibly for the first time in my adult-life. What’s more politicians and regulators are also starting to pay attention to their responsibilities and curbing excesses. To me this is signalling a very slow and super steady recovery. Amen!

Oh and by the way, it bears repeating:

The fact is that recessions cannot be as deep as they once were because regulators have more policy tools available to them now than ever before (though they could use more). And even more importantly, business people have daily information as to what is going on throughout the many tendrils of their businesses. This means that they can respond to crisis rapidly. Thus, a “Great Depression” that is caused by economic dislocation is highly unlikely to occur. Its occurrence would most likely be caused by economic troubles coupled with some sort of mass catastrophe like a plague, or meteor strike, or global war, or some other externality. Overwhelming chaos would have to occur for a true global depression to happen again.

Be spending time investigating prospective investments – prices are still reasonable for many quality companies.

Deep respect to each of you!

Jason